*

With stocks near record highs, investors see opportunity

to

diversify concentrated positions

*

Use of covered calls gain traction to hedge the risk,

provide

income and manage tax liabilities

*

An estimated $15 tln in stock holdings ripe for covered

call

strategies

By Laura Matthews

NEW YORK, Sept 10 (Reuters) - For investors with

portfolios of individual company stocks, Wall Street's

record-breaking rise is boosting the attractiveness of an

options strategy that helps them hedge single stock risks while

earning some income as they diversify their portfolios.

While the use of covered calls is not new, portfolio

managers said they are finding growing adoption of the strategy

among individual investors with large positions in big tech

stocks, baby boomers and corporate executives with legacy

holdings gained from being paid in company shares.

One way advisors and managers are approaching the growth of

their clients' single stock exposure is by using customized

covered calls that let investors slowly sell out of stocks and

diversify their holdings, as well as manage taxes.

In the covered call trade, investors sell calls on the

stocks they own to earn extra premium income.

A call option gives the buyer the right but not the

obligation to buy the stock at a set price in the future. The

premium earned can be used to buy a put option conferring the

right to sell to protect against losses.

Some portfolio managers estimate that up to $15 trillion

of concentrated stock positions are ripe for covered calls and

similar strategies.

"The concentration in the market is so much greater than

what we've seen in the past, so, there are more of these cases,"

said Jake Marriott, options portfolio manager at Aptus Capital

Advisors.

"The growth of ETFs (exchange-traded funds) and the use of

options-based products are opening people's eyes to the

possibilities and the different things you can do with options,"

he said.

The S&P 500 has risen 30% since a shakeout in April

and is up 10% for the year, driven in part by advancing

artificial intelligence-related technology stocks and the

standout performance from defense-focused software upstart,

Palantir Technologies ( PLTR ), leaving holders with decisions

to make on how to manage the gains.

Aptus is structuring the trades with shorter duration for

about 50 individual clients' separately managed accounts (SMA),

helping them deal with the risk in dozens of individual stocks

from Amazon ( AMZN ) and Nvidia ( NVDA ) to Lowe's and

Walmart ( WMT ), as well as portfolios of stocks.

SMAs are investment portfolios of individual securities

directly owned by an investor and managed by a professional

manager. That market itself is expected to rise to $3.15

trillion in 2025, up from $2.75 trillion in 2024, according to

data from research and consulting firm Cerulli Associates.

"Advisors are thrilled to have a solution now for these

positions that previously they couldn't do anything for. These

positions were held on the side," said Aptus' Marriott.

TAKING MONEY OFF THE TABLE

The amount of money you can make from selling options

depends on how volatile the stock or market is - the more

volatility, the higher the potential income.

Because active covered calls are often traded in client

accounts with other assets and do not have to be publicly

disclosed, data on their use is limited.

But in general, covered calls have become increasingly

popular over the years, evidenced by the growth of assets

invested in exchange-traded funds focused on derivative income

strategies. That totaled $150 billion at the end of July, up

from about $7 billion in January 2020, data from Morningstar

Direct show.

The first seven months of this year saw those funds take in

more than $40 billion, some $22 billion more than the

corresponding period for 2024.

"If you've made a lot of money in a single name, you may

want to take some or all of it off the table and get in a

diversified portfolio," said Tom Lee, chief investment officer

at Parametric Portfolio Associates. "So, (people are looking at)

how do you do that without creating a material tax liability."

Reasons for seeking an exit strategy vary by individual.

An investor with retirement income needs might sell covered

calls more conservatively, focusing on options that have a low

probability of being exercised at expiration, which raises the

chances of keeping the premium and retaining the shares.

"I think we are likely to see an increase in these

tax-efficient strategies in the coming years as home offices add

these to their platforms and advisors and clients begin to

better understand them and their use cases," said Michael

Manning, a research analyst in the Wealth Management practice at

Cerulli.

For purposes of diversification, investors can sell covered

calls closer to the money. If the stock price goes above the

call strike, the options generate a loss which is used to offset

the taxable gains from the sale of some of the underlying

stocks.

"It forces you to be disciplined," said Chris Murphy,

co-head of derivatives strategy at Susquehanna. "It lowers the

volatility exposure of investors. They give up upside in

extremely strong scenarios, but it lowers their volatility

exposure in every scenario."

Firms like Gateway Investment Advisers are already expanding

to meet the demand, acquiring Belmont Capital Group in July, a

provider of customized, options-based strategies for SMAs.

That large asset managers are also growing and expanding

into the space, "is also signaling this is early innings," said

Eric Metz, chief investment officer at SpiderRock Advisors, a

wholly owned subsidiary of BlackRock ( BLK ).